It’s the Conservative party conference this week, and yesterday was George Osborne’s speech. Amongst the usual talk of deficit reduction and boldly staying the course were a couple of surprise announcements, including a new tax break to encourage gas fracking: “We are today consulting on a generous new tax regime for shale so that Britain is not left behind as gas prices tumble on the other side of the Atlantic.”
This is odd for a number of reasons. The first is that the Energy and Climate Change Department (DECC) don’t appear to know about these plans to encourage fracking. When asked about the announcement yesterday, they claimed it was the first they had heard of it.
This is important, because fracking in Britain was suspended last year after it was found to have caused a minor earthquake. The decision on if and when to restart fracking rests with DECC, not the Treasury. On Monday, the energy minister said he hoped fracking would be able to restart, but that “questions about regulatory oversight and the involvement of communities need to be answered.”
The chancellor appears to be writing energy policy single handedly.
The announcement is also odd because it’s a bad time to be seeking to imitate the US. The price of gas hasn’t just ‘tumbled’ in the US, it has collapsed, taking investors with it. Shale has turned out to be an asset bubble, and that bubble is currently popping. The number of operating fracking rigs in the US has fallen by a third this year.
Finally, the obsession with fracking is odd because the government’s own research shows that fracking is “unlikely to be a game-changer” in the UK, and that it will be expensive and complicated. According to the British Geological Survey, there are potentially 150 billion cubic metres of gas tucked away in our rocks. That sounds like a lot, but it’s actually only 1.5 years’ worth of gas consumption, so there’s not a whole lot to go for. Then you have to consider that land in Britain is much more expensive than the US, and that population density it much greater, making fracking much more complicated and potentially uneconomic. All of this is in the House of Commons report, and it’s why the government consulted on it earlier this year and decided that fracking wasn’t economical and wouldn’t be fast-tracked.
None of this means that there’s no role for fracking. I suspect that it will get the green light and might proceed in a few places. I also suspect it will be a huge struggle to get permission to do it at the local level, with local Tories coming out fighting in their constituencies. If we press ahead, the best we can hope for is to offset some of our LPG imports for a few years, but it’s expensive and won’t necessarily bring fuel bills down. In the long term, it is no substitute for renewable energy and household efficiency. Most importantly, it isn’t proceeding at the moment because we don’t have a regulatory framework in place to ensure it is done safely. It is somewhat premature to be suggesting tax incentives for something that is currently suspended while regulation is sorted out.
All told, it’s rather bizarre to hear Osborne talking up shale gas and suggesting Britain will be “left behind” if we don’t get involved. Is he talking to the other departments in government? Is he reading the same reports? Or is he just banging the drum for fossil fuels because that’s what the conference wants to hear?
The Earthbound Report 
I blogged about this a few weeks ago. George is trying to make up energy policy and it won’t work. Shale gas is more expensive to extract and puts a floor under gas prices. It won’t bring down prices here but raise them as they are rising now or soon.